Rate, Value and Valuation

Since we just finished our budget certification for the fiscal year that begins on July 1, 2021, I thought it might be interesting to spend a bit of time talking about the budget process. Budgeting is an ongoing evolution that includes forecasting as far as five years into the future. We have developed models that help us make assumptions based on enrollment trends, growth in per pupil cost, changes to tax policy, and fluctuations in property valuations. The challenge is understanding how each of these variables relate to one another and realizing that one minor change in any can make a big difference when looking into the future. Our models provide a platform to refine and develop our work on an annual basis. Budget development for the next fiscal year typically starts in late November and is wrapped up no later than April 15th. What you see in the newspaper each February or March is simply a summary that provides little insight into the total budget. The fact of the matter is that beyond publication of the tax rate, the usefulness of the published budget is limited as a tool of management, particularly since it provides only a high level of insight. Today I want to spend some time providing a bit of context. To begin, I think an explanation of property tax is a great place to start. 

If you have tracked our tax rate over time, you probably are aware the tax rate has dropped over the last decade. You can see our historical tax rate here, which provides perspective back to 1997-1998. The column titled 'certified' is the tax rate that was approved by the Board of Directors during the budget hearing in that particular fiscal year. The column labeled 'DOM' is the final rate as determined by the Iowa Department of Management following the legislative session. The finalized rate by the DOM generally isn't available until late May or early June and is almost always lower than the rate certified by the board. This is because there are typically changes made by the legislature following the boards certification of the budget that impact the tax rate. The only caveat to these changes is that by law, once the rate has been certified by by board it cannot be subsequently raised by the Department of Management.

So if the tax rate has consistently dropped, is your tax bill lower? Perhaps, but not necessarily. That is because there are a lot of variables used to calculate your tax bill. First, and perhaps most important: school taxes aren't the only taxing authority that your property taxes support. Among some of the entities in addition to schools that are funded through property taxes include cities, counties, and community colleges. Each taxing authority has the responsibility to set their rates, and obviously if one rate decreases while another one rises the property owner sees little if any change. 

A key variable in determining your tax bill is the value of your property, and more specifically the percentage of valuation [of that property] that is used to calculate your tax bill. For the sake of simplicity, let's assume you own property valued at $100,000. The Iowa Assessment Limitation has implemented a 'rollback' that is applied to your assessed valuation. Again, using that assumed assessed valuation of $100,000, in 2019, the property tax bill would have been calculated on a valuation of roughly $55,000 when using the rollback. In 2020, that same property would have been applied on approximately $56,000 of your assessed value. You can view the rollback chart by clicking here. You will note the rollback changes every year. It is important to understand this table doesn't take into consideration how your property value may change over time. Our homes do increase in value, which helps us to buildup equity in our investment. 

Once all those variables are known, the calculation of your property tax bill is quite simple. You simply take the taxable valuation of your property (after applying the appropriate rollback percent), divide it by 1,000 and then multiply by the tax rate. The example to the right assumes a property valued at $100,000 with a rollback of 56%. In our modeling, we use an assessed value of $157,686, which is the average home valuation in Hudson. 

It is important to point out the examples used in these illustrations are based on residential property owners. Nevertheless it is important to keep in mind there are multiple classes of property that are subject to rollbacks. We primarily focus on residential property since the vast majority of property owners in our school district are residential property owners. That stated, we have agriculture, multi-residential (apartments), industrial, and commercial all represented. Rates are also applied to utilities as well, but that is a complication we don't necessarily need to get into at this point!

Finally it is important to note that property tax is but one revenue source that is used to build our budget capacity. The fact is, the biggest contributor of revenue in our budget is state aid. In fiscal year 2020, 58.2% of our budget resources were from state aid whereas 39.4% came from property tax collections. In a future post, we'll talk more about how the blend of state aid and property tax is calculated in a mechanism known as the aid and levy worksheet.